Daily Archives: December 28, 2014

As 2014 wheezes and coughs to its termination, I wanted to share some of what I consider to be the best posts of the year. I am immensely proud of Slope of Hope, which – – incredibly – – turns ten years old next year, and I am exceedingly grateful to those of you who has chosen to spend part of your days here on a regular basis (for some of you, almost as long as the blog as been in existence). Here is the first part of my retrospective:

For most commentary on the recent and sharp decline in oil prices, there is a serious ceteris paribus to it especially from those that don’t recognize that there are much deeper financial forces. The following is excerpted as an example of the closed system approach, as if there is a world of difference that can allow “decoupling.”

What matters is what’s causing prices to decline: an increase in productivity or a decline in economic activity. Only in the second case is there a serious danger that the Federal Reserve should try to respond to. Similarly, rising prices can be a sign that monetary policy is too loose, but can also reflect declines in productivity.

This is a tangential explanation to the second stage of oil price excusing. Some will “predict” that though demand has fallen, “unexpectedly” of course, it will not remain so weak for so long. This alternate but associated justification is that foreign demand, and only in discrete locales that are unrelated, is to blame as the US surges forward unobstructed (5% GDP and all that).

There are, however, two wrinkles worth noting. One is that although the fall in the price of oil doesn’t appear to reflect any weakness in the U.S. economy, weakness abroad may be a factor. But that’s a reason to loosen money elsewhere, not in the U.S. A second is that there is a reasonable argument that monetary policy in the U.S. has been a little too tight even leaving aside this price decline. If that’s correct, then some added pressure for loosening, even if that pressure is based on a mistaken worry, might not be such a bad thing.

And thus the utter craziness of monetarism is on full display, in that after arguing that declining oil prices are good for American consumers, they are also suggesting that monetary policy is “too tight”, and thus oil prices are contradictorily “too low.” That betrays the central aspect of this orthodox embracing of lower energy prices as nothing more than a shaky rationalization – they still are not comfortable with low prices but accept them lest anyone get worried about what they really suggest. Orthodox monetary theory is, when stripped of its academic trappings, dedicated to high oil prices and low wages.

Ultimately, oil prices do not operate in a vacuum, nor even a financial one. If oil prices were on their own declining as they have, this argument might have more merit (stress and overstress “might”). However, these closed-system masters, as they fancy, never address financial reality. Oil prices signal economic weakness and bond markets second that. The US bond market is not purely dedicated to Russian economic foundering or Brazilian inflation, but rather growing quite concerned in historical context of US economic cycles.

The yield curve itself has been shifted upward by the late 1980’s intrusion of interest rate targeting – where the Federal Reserve has obliterated the meaningful restrictions on private “money supply” (NOTE: we still do not know specifically when the FOMC switched to a pure interest rate target of the federal funds rate, but it certainly was evident before and heading into the 1990-91 recession). That is the problem with these closed system adherents because saying something like, “that’s a reason to loosen money elsewhere, not in the U.S.” is wholly unlike financial reality.

The credit markets are in tandem with oil prices, not on some distant shore but these United States. Despite the artificial and upward shift in the yield curve, the relative relationship of its shape has been a near-universal signal of contractionary tendencies. In that altered respect, the current flattening approaches what might fairly be called equivalency with past episodes.

The commonality is, of course, the modern “dollar” and its eurodollar aspects. The global exchange standard altered in the late 1960’s and then again in the 1980’s. There is no coincidence that bubbles, global credit bubbles, started under the latter as eurodollars began to “finance” not just trade but speculation. That is the nature of this artificially steepened yield curve – and its opposite position is that undoing.

Ambrose Evans-Pritchard, writing in The Telegraph in the UK, at least recognizes that the world is united under a “dollar” system, but then dismisses that very linkage.

The world’s financial system is on a dollar standard, not a euro standard. Global loans are in dollars. The US Treasury bond is the benchmarks for global credit markets, not the German Bund. Contracts and derivatives are priced off dollar instruments.

Apparently taking a page out of China’s book, Factually reports the Philadelphia Federal Reserve office (apparently aware of the worthlessness of their fiat currency) sends old currency to local power plants, where it’s burned for electricity. As WSJ reports, The Fed destroys more than 5,000 tons of U.S. currency a year – most of it once went to landfills, but the central bank has pushed for years to go green with all that green. It appears we have come a long way from the Federal Reserve Bank of Richmond’s 1953 annual report when it boasted it had “money to burn.”

I am amazed daily to see just how many adults (never mind the teenagers) seem absolutely oblivious to their surroundings. Seemingly intelligent people walking with their heads down flailing away on a keyboard built for ants either trying to find out “what’s happening” in the world or, to let the world know on some social networking platform what they ate for dinner, if they just showered, or posted their 2,375 picture of themselves in a compromising pose or situation.

They tweet, post, paste, share, spread, etc.,etc.,etc. But ask them a question about a relevant subject such as the economy, state of global affairs, or more that might impact their future? You’ll just get a blank soulless expression of bewilderment.

You know that look, it’s the same look you get when one of these clueless figures walks right into you in some store or mall. Do they say sorry? Or, excuse me?

The last time the market was as euphoric and as complacent as it is now, was in the happy go lucky days of 2006 when every day stocks surged without a care in the world, when Lehman bankers were looking to a comfortable retirement after cashing out their stock (then trading north of $70), when the only question was which mega M&A and supermega LBO will hit next, and when the then-brand new Fed chairman Ben Bernanke said there is nothing to worry about because subprime was contained and because home prices in the US just can not possibly drop. Not surprisingly, late 2006 was also when Citigroup held its first and only Plutonomy symposium: a joyous celebration of the 0.001%, or as Citi called them, “The Uber-rich, the plutonomists who are likely to see net worth-income ratios surge, driving luxury consumption”, adding “Time to re-commit to plutonomy stocks – Binge on Bling. Equity multiples appear too low, the profit share of GDP is high and likely going higher, stocks look likely to beat housing, and we are bullish on equities.”

Wait what? Was there really a time 8 years before the French economist Piketty bashed (and made millions in the process) class and wealth inequality, when one of the world’s soon to be most insolvent banks had a symposium in which the bank pulled a page right out of pre-revolutionary France and celebrated the world’s mega rich?

Yes, and that’s not all.

In a trilogy of reports authored by Citi’s then head of global srategy, Ajay Kapur (who subsequently quit Citi, tried his hand at running a hedge fund, failed, went to Deutsche Bank to head the bank’s Asian equity strategy, failed, and has for the past year been working at Bank of America in that pluotcracy mecca, Hong Kong), couldn’t find enough words of praise to explain just how great the brave new world is, one in which the 0.1% control about half of the world’s financial assets, and said, on September 29, 2006, that “we think the balance sheets of the rich are in great shape, and are likely to continue to improve.”

In retrospect we now know he couldn’t be more wrong, and as events just two years later proved, it required a coordinated, global multi-trilion bailout of the entire financial system (which is still ongoing), to avoid the total collapse of the balance sheets of the rich.

However, the flip side of this ongoing intervention by central banks has meant that the (merely) uber rich in 2006 have since become uberest rich, and the nascent Plutonomy of the mid 2000s has morphed into a giant monster unseen at any time before in history.

And since the class divide of society has only gotten worse, here are some of Citi’s observations on Plutonomy back then, which are even more applicable now.

Very quietly and under the radar, authorities in China have cracked down on Christmas celebrations in China, deeming them “Western spiritual pollution.” As CNMNews reports, for several years, a virtual rush to convert to Christianity has been underway in China, both in its Protestant and Catholic versions. The Department of Education this year issued a directive to limit Christianity’s appeal to young people, banning Christmas events and celebrations in schools and kindergartens, deemed “kitsch” and “un-Chinese”. The crackdown has also been spreading to universities and colleges nationwide. The result is nowhere more evident than in Google’s traffic in China…

While the US-led coalition claims that the first fighter jet was “not downed” by ISIS, the fact that ISIS is now claiming to have downed a 2nd fighter jet in Balad (north of Baghdad) and captured the pilot, suggests the west may not be being entirely honest (two ‘crashes’ in a week is perhaps more worrisome than 2 ‘shot down’ in a week). What is even more disturbing is the fact that ISIS has taken to social media to ask how the first captured Jordanian pilot should die…